Workers’ Compensation is a complex subject.  Laws vary from state to state and different circumstances yield different outcomes for individual claims.  In an effort to make the topic more digestible, I’d like to rehash some of the basics.

What is Workers’ Compensation?

Workers’ Compensation is a form of insurance providing wage replacement and medical benefits to employees who are injured in the course of employment. In exchange for these provisions, the injured worker gives up his or her right to sue their employer for the tort of negligence. This is known as “the compensation bargain”, as it ensures security of compensation to the worker while protecting the employer from the risk of a high damage award. Employers may provide coverage by purchasing insurance on the private market, from a state fund (where applicable), or by self-insuring. The first statewide Worker’s Comp law was passed in Maryland in 1902. By 1949, all states had enacted a Workers’ Compensation program. The federal government has its own system for providing Workers’ Comp to federal employees.

Who is required to have Workers’ Comp?

Generally speaking, the vast majority of employers are required to carry coverage. However, not all employers are required to have Workers’ Compensation coverage. State laws vary, but an employer’s responsibility to provide coverage usually depends on how many employees it has, what type of work the employees are doing, and what type of business it is. Some exempt employers may purchase Workers’ Compensation insurance even if they aren’t required to do so. State laws may allow them to “opt in” to the system; thereby allowing them to participate in the compensation bargain.

What affects Workers’ Compensation costs?

Workers’ Comp is based on the concept of spreading or sharing risk by members of a group who are likely to experience losses. As such, a mathematical formula is applied to determine costs. The largest controlling factor in the formula is generally called the experience rating or experience modification. This factor compares an employer’s claims history with those of other employers in the same industry. The experience rating attempts to adjust premium levels so that the amount that an employer pays will be sufficient to cover its losses as well as the expenses incurred by the insuring organization in the process of handling the employer’s Workers’ Compensation program. The frequency of claims is heavily weighted in the calculation of the experience modification formula.

In my next article, we’ll look into the hidden costs of Workers’ Compensation claims and how they can impact your business.